Municipal Bond Credit Surveillance
With more than 50,000 issuers in the municipal bond market representing about 1.5million bond cusips, none are more important than yours. So when the economic climate becomes difficult, investors naturally wonder how they can keep abreast of developments that may affect their municipal bond and municipal bond funds.
Industry experts have have cautioned advisors and investors to to avoid mutual funds that are merely managed indices which lack aggressive management of their portfolios. Some fund companies have reduced staff and analysts, he says, making it more difficult for them to conduct comprehensive credit surveillance for the 65,000 issuers in the muni market. When paying bond fund fees, make sure you are getting the credit surveillance you are paying for.
Surveillance and review of municipal bonds and municipal bond funds relies heavily on disclosures provided by issuers. Unlike corporate bond issuers, who are required to file numerous detailed reports with the Securities and Exchange Commission's Edgar Database, gathering disclosure filings by municipal issuers can often be difficult. Fortunately, municipal bond disclosure practices have improved in recent years, but enforcement could be improved. Nevertheless, many issuers, especially larger or frequent borrowers, do provide regular updates on finances and other data that is essential to determining their ongoing performance.
A major source of information comes from the rating agencies. Issuers with ratings are required to furnish updated information on a continuing basis. Failure to do so can result in the suspension of an issuer's rating.
The ongoing surveillance process at the rating agencies poses a bigger challenge than the new issue rating process since there are an estimated 18,000-plus outstanding rated issues. About half the issuers have their ratings reviewed regularly since they issue debt fairly often, and any new bond ratings require a review of the older ones.
Of more concern, there are about 30,000 unrated municipal bond issuers. Owning unrated bonds requires more due diligence when reviewing their associated credit risk. Alternative ratings solutions such as fro www.Bondview.com , that rely on market implied ratings, are a good source to obtain information about these unrated bonds. Bondview re-rated all 1.5 million bonds on a daily basis.
However, Credit rating agency re-rate bonds depending on how concerned they are there may need to be an adjustment. Certain market sectors, such as health care or long-term care, may be reviewed more often since the dynamics of those sectors are more volatile and sudden changes in their financial picture can impact payment of debt to a greater extent than for a general government bond. Other sources of data about bond issuers are "repositories" where issuers file financial reports. These include Bondview’s FREE municipal bond information website, the MSRB's "Emma," and paid services such as Bloomberg. Filing requirements and the issuer's promise to comply are detailed in a disclosure document that appears at the end of the "Official Statement" accompanying every bond issue.
Municipalities typically post budgets and Comprehensive Audited Financial Reports (CAFRs) on their Web site or make them available through the city's finance department. These CAFRs contain audited financial statements, comments from city officials and a statistical section with historical information on the economy, tax collections and debt ratios.
The Government Accounting Standards Board (GASB) publishes an excellent guide for investors on how to read and analyze a CAFR.
Muni ratings more stable than corporate cousins. The municipal bond market has enjoyed greater rating stability than the corporate bond market.
Since muni bonds are long-term instruments, changes in an issuer's financial or economic profile must be evaluated as to whether they are permanent, or represent a one-time blip in an otherwise creditworthy history.
Once again, unlike their corporate cousins, muni bond issuers rarely go out of business, and their default rate remains extremely low.